CORPORATE ACCOUNTING

RESEARCH ASSIGNMENT

TOPIC

Gum Pty Ltd (Gum) is a private company with many strategic investments. The finance director is concerned that he might be required to consolidate some of these investments, pursuant to AASB 10. Details of the investment relationships are as follows:

  1. Gum has a 25% interest in the share capital of Wattle Pty Ltd (Wattle), which is a company involved in the same industry as Gum. The remaining 75% of the share capital is owned by Wattle’s founders, Mr and MrsRose. Mr and MrsRose are unfamiliar with the industry and so have given Gum three of the five seats available on the board of directors. Gum takes the lead on all decisions but the business is closely monitored by Mr and MrsRose who hold the other two board positions.
  2. Gum has a substantial loan receivable from Acacia Pty Ltd (Acacia). Acacia, as a result of the current economic climate, has experienced significant trading problems. Acacia has failed to make its regular payments under the loan agreement. Gum has become concerned about the recoverability of the loan and has reach an agreement with the management of Acacia thatGum executives will take control of the company’s finances for a period of five years. An executive of Gum has been given control of Acacia’s cheque book and makes all payments. Gum has not gained any seats on Acacia’s board of directors, which is still dominated by Acacia shareholders.
  3. Gum owns 50% of Box Pty Ltd (Box), with the other 50% being owned by Lilly Pty Ltd (Lilly). Both companies have equal voting rights and an equal share of seats on the board of directors. Under an agreement with Lilly, Gum supplies the finance to the company on normal commercial terms. The loan is fully secured against the assets of the company. Lilly provides the management and entrepreneurial flair to Box. Under the agreement forged,Lilly will receive a management fee in respect of the net profits of Box after allowing for interest payments on the Gum loan. In times of no profits the interest payments will still be met but Lilly will not receive any remuneration.
  4. Gumoperates the trustee company for the Gum Trading Trust. The trust is a discretionary trust with the nominated beneficiaries being the directors of Gum. These directors are MrFuschia, MrsGlady and Mr Lilac. Over the years the trust has distributed its income in the following proportions;MrFuschia 70, MrsGlady 20 and Mr Lilac 10. Under the terms of the trust deed, Gum has complete control over the operating and financing decisions of the trust.
  5. Gum holds 75% interest in Orchid Pty Ltd (Orchid). The interest was created when Gum converted a substantial loan it made to Orchid into equity at the invitation of Orchid when Orchid began trading poorly and recovery of the loan seemed uncertain. Orchid has a large deficiency in net assets and has been consolidated for many years. Gum is a passive investor, having no seats on the board of directors and no say in the financing or operating decisions of Orchid.

REQUIRED

  1. Advise the finance director of Gum of the requirements of AASB 10 in respect of the control criterion.
  2. For each of the above investments:
  3. Discuss in which entity control lies; and,
  4. Explain whether consolidation is required.

MARKING GUIDE

Assessment / Score Allocation / Word Count / Very Good / Good / Average / Poor / Very Poor
1. Synopsis / abstract / 2.5 / 150
2. Introduction / 5.0 / 150
3. Part 1 - Control / 30.0 / 600
4. Part 2a – Entity control / 20.0 / 450
5. Part 2b - Entity consolidation / 25.0 / 500
6. Conclusion / 5.0 / 150
7. Referencing and citations / 5.0
8. Evidence of reading, quality and quantity / 2.5
9. English expression, coherence, grammar and spelling / 5.0
Score (out of 100) / 100.0
Mark (score divided by 4) out of 25

INFORMATION

Yourassignment must be submitted at the beginning of your seminar in Turnitin. Penalties will apply for late submission.

The following matters should be given particular attention:

  1. Assignments must not exceed the word counts indicated. Double space your pages, use a 12-pt Times New Roman font, use 2 cm margins on all four sides of your page.
  2. Your assignment must include an abstract/synopsis, introduction, body that clearly addresses the problem areas, a conclusion and a properly referenced appendix.
  3. Evidence of extensive research beyond the prescribed text is required. Ensure these are referenced appropriately. Refer to the statement regarding plagiarism.
  4. NO extensions will be granted unless supported by appropriate documentation prior to the due date.
  5. This assignment must be handed in for successful completion of the course and will count 25 marks towards the final mark.
  6. The word count for the assignment is 2000 words. Please refer to the Research Assignment Marking Scheme for the specific allocation of words for each specific section of your assignment (refer point 2 above).
  7. Scores (fractional marks) have also been allocated to each specific section of your assignment.